Representative John Campbell (R-CA), Chairman of Financial Services Subcommittee on Monetary Policy and Trade, discusses new legislation to eliminate “Too Big to Fail” with Peter Cook on Bloomberg Television’s “In the Loop with Betty Liu”. Campbell’s legislation, the Systemic Risk Mitigation Act, would prevent future taxpayer-funded bailouts of large financial institutions that currently pose a systemic risk.
Federal Reserve Governor Daniel Tarullo, Dallas Fed President Richard Fisher and Senator Sherrod Brown (D-OH ) have all said recently that the 2010 financial reform legislation better known as Dodd-Frank has failed to reduce the size of the big banks even though its law promised to do just that. Now Republican Congressman John Campbell of California has introduced his own bill to deal with too big to fail institutions.
Its purpose: to protect the banking system while eliminating the implicit guarantee of a government bailout paid for by taxpayers.
Campbell told Yahoo’s Lauren Lyster:
Campbell’s Systemic Risk Mitigation Act would require banks with at least $50 billion in assets to hold additional capital, including at least 15% of their assets in long-term bonds. If a bank were to fail, those bondholders would have to take of loss of at least 20% on their investment, which could pressure banks to reduce their debt and protect taxpayers from a government bank bailout.
“Having investors with a lot of skin in the game is a better regulator than having a government regulating watchdog,” says Campbell.
His bill would also repeal the Volcker Rule which is included in Dodd-Frank and bans proprietary trading. Campbell says the Volcker rule wouldn’t be necessary with the additional capital banks would be required to hold but it “wouldn’t hurt things if you left it in.”
While this is a good start, it doesn’t go far enough. 15% capital isn’t sufficient, not for the kind of leverage we know that the TBTF banks have been using. It is imperative that everyone understand that the banks have ZERO capital requirements, which lack of requirements were implemented courtesy of Henry Paulson and with the passage of EESA and TARP. At minimum, what is needed is the restoration of Glass-Steagall, which would ensure that banks could not co-mingle commercial banking and investment banking or preferably implementation of Karl Denninger’s One-Dollar-Of-Capital. To do anything less, is nothing but an exercise in futility.